Accounting, economics, and handball

Menu

Monthly Archives: April 2017

Consider just one tax change that should be made and certainly will not be. The deductibility of mortgage-interest payments, by which the government will forgo collecting nearly $1 trillion in the next decade, is treated as a categorical imperative graven on the heart of humanity by the finger of God because it is a pleasure enjoyed primarily by the wealthy. About 75 percent of American earners pay more in payroll taxes than in income taxes, and only around 30 percent of taxpayers itemize their deductions.

We agree with George that it would be an improvement in the tax code. What is unusual is that George doesn’t tie it to The Donald’s tax proposal that came out recently. We all agree that his whole tax proposal will not pass as is but it is the proposal that we currently have. According to USA Today, part of the proposal is:

The standard deduction, currently $6,350 for single people and $12,700 for married couples, would double. As a result, many more low to moderate income families would pay no taxes. But all other deductions, except for mortgage interest and charitable contributions, would be eliminated, including state and local taxes and medical expenses.

So for married individuals would need over $25,000 in deductions to itemize from just mortgage and charitable contributions. According to USA Today, this change would reduce itemizers from George’s estimate of 30 percent to just five percent. The Donald would effectively kill the mortgage interest deduction. We are sure that The Donald can count on George’s support.

Recently we went to our old school to see some of the presentations of Money Smart Week. One was from Adam Carroll about student loans. Another was from Billy Corben on his documentary Broke about financial failure among professional athletes and especially successful ones. They were great speakers with interesting stories to tell.

Upon reflection, Adam and Billy’s stories only differed by three zeros. The athletes were typically in their early twenties when they found ways to destroy millions of dollars and wreck their financial well-being. The students were in their late teens and early twenties when they laid waste to their financial futures by mounting up thousands of dollars in student debt.

Billy and Adam tell the same story. Young people have been asked to make complex decisions that few people are equipped to make. They often over borrow or over spend or both. The usual cause is failure to understand compound interest and it is exacerbated by poor or dishonest advice.

The actions by the students were less catastrophic for them because most of them could survive their bad decisions but more catastrophic for the rest of us. When a few hundred athletes wreck their lives it is a disaster for them but not for us. When a generation has to put off having children and buying houses it hurts everyone. There is lots of money in fixing the athlete problem. There is less money in fixing the student loan problem but it is more important. The first step in fixing the student loan problem is getting good data. We know about the overall numbers but how do they come about? Are they just for tuition? How much is accumulated living expenses.

Adam talks about playing offense (making money) and playing defense (not spending money). Because tuition has gone up everyone seems to think that that is the sole cause of student debt. It might be. It surely is part of it but it seems likely that once you borrow a large sum adding on a non-trivial sum is easier. We would like to have better evidence.

Student debt is another reason for teaching financial literacy in college. It might be a required course like personal finance, presentations like Adam and Billy, woven into the curriculum, or all three. Money Smart Week is a great idea but the turnout at the sessions we attended were disappointing. It is another area where colleges need to do better.

We like Kevin Williamson even more that Jonah but here we are complaining about both of them in one day. Kevin often jokes about his English major math to show that even English majors can have a talent for economics and arithmetic. Today, however, it lets him down.

We agree with his article that the corporate tax rate should be zero. It is the only correct answer to the question: What should the corporate rate be? We agree with his reasoning that it would eliminate all the lobbying joy of getting deductions from Congress and accounting joy of creating ones the Congress didn’t quite envision. It is also much easier to tax capital gains and dividends. Increasing both of those will recover some of the lost revenue.

The arithmetic problem. Sigh. Kevin says:

The simplified version: If Corporation X makes $1 billion and has $900 million in expenses, then it has $100 million in taxable income, which is subject to a top rate of 39 percent. Most corporate income is taxed at the highest rate.

The corporate tax schedule does have a top rate of 39% but very little is taxed at the highest rate. See tax rates here. The highest rate is only for income from $100,000 to $335,000. The tax on $100 million would be 35% or $35 million.

We do support eliminating the corporate tax (the death tax, the gas tax (replaced by a carbon tax), and all tariffs ) but the average and marginal corporate is 35% after $18,333,333. That’s why the table says 35% of the amount over zero.

We love Jonah Goldberg but wish he would give up the ghost on Never Trump. Of course there are a few folks that are moving the goalposts with The Donald but it was a binary choice between The Donald and Herself. So when he says in his newsletter (it isn’t on NRO yet):

Then there are the folks who are mostly-in for Trump. Every day I hear people say on Twitter, “Yeah, he’s flawed but at least he’s not Hillary.” But what kind of standard is that? I’m glad Hillary’s not president. Truly. But if your yardstick for a Republican president — not candidate, but president — is now “He’s better than Hillary,” then you’ve filed down the yardstick to a couple inches. “Better than Hillary” strikes me as the minimum requirement for a conservative president, not an omnibus justification for anything he does.

We probably fit in the mostly-in for Trump. We had a choice, a binary choice, between Herself and The Donald. We too are glad that the country agreed with us and made the choice it did. Sure there are fans of the current president that are as deluded as the fans of our most recent past president. There are also folks who hated one or the other. We need to move on from both groups. Whether you are metric or not the measurement in a binary choice is which one is better. That is the only measuring stick in a binary choice. Ex ante we thought The Donald was the choice. Ex post, or at least after 100 days, that judgment has been confirmed. We would have preferred that we were starting Mitt’s second term rather than The Donald’s first. That (and whatever Jonah’s first choice was) wasn’t on the ballot and Jonah needs to remember that.

The Donald’s administration had to act on tax illiteracy as reported in the WSJ. First, the administration said correctly:

When he was asked about tax incentives for retirement, Mr. Spicer said that the only deductions protected from repeal in a tax code overhaul were those for mortgage interest and charitable contributions.

But some tax illiterate reporters thought that this would endanger the tax status of 401-k plans. So they needed to reiterate:

The administration clarified Mr. Spicer’s comments after the briefing, making clear no changes to 401(k)s and similar retirement accounts were proposed as part of Wednesday’s announcement. The breaks for 401(k)s aren’t technically deductions; contributions are excluded from the income-tax base. [Emphasis added]

Nope, they didn’t clarify Mr. Spicer’s comments. They might have reiterated or explained them but there was nothing unclear about the first briefing. The technically we bolded is simply an admission of error. The sentence is more accurate without it. We expect that the misunderstanding on the part of reporters is more likely to be foolishness rather than nastiness.

Recently we saw a magazine headline that went something like: Is Trump A Plutocrat Or Fascist? An Internet search reveals that the magazine is Harper’s. You have to subscribe to see it. We knew that it wasn’t worth a look given the title. This is not a binary choice like The Donald or Herself. We went to Wikipedia to see what choice we were being given. We found this on plutocracy (nope, it is not being ruled by beings from Pluto):

Plutocracy is a form of oligarchy and defines a society ruled or controlled by the small minority of the wealthiest citizens. The first known use of the term was in 1652. Unlike systems such as democracy, capitalism, socialism or anarchism, plutocracy is not rooted in an established political philosophy. The concept of plutocracy may be advocated by the wealthy classes of a society in an indirect or surreptitious fashion, though the term itself is almost always used in a pejorative sense. [Emphasis added, footnotes and pronunciation deleted]

And this on fascism:

Fascism is a form of radical authoritariannationalism, characterized by dictatorial power, forcible suppression of opposition, and control of industry and commerce …. the term is instead now usually used pejoratively by political opponents. [Emphasis added, footnotes and pronunciation deleted]

In fact, Wikipedia has an entry on fascist as an insult with a great quote by George Orwell in footnote one. So the magazine has tried to create a binary choice on which way to insult The Donald. There are lots of telling things to say about The Donald. One is that he is not a political philosopher and that means that he is neither a fascist or plutocrat. We suggest that folks find better ways to insult him.

The Donald has allegedly released a one page document that outlines his tax proposal. We say allegedly because lots of folks are evaluating the document but nobody says where it is. It isn’t on the White House site (at least as of now). We can’t find it linked on any of the WSJ, NYT, or WAPost articles.

Say a business owner has net income of $1 million a year from a partnership, plus substantial other income. Currently the top tax rate on the $1 million is 39.6%, or $396,000, whether the income is wages paid by the partnership or business income.

Laura and her editors should know that 39.6% is the marginal rate that kicks in, depending on your filing status, after $400,000 in taxable income. She is confusing the average tax rate with the marginal tax rate. Thus, her analysis of the potential savings to business owners is way off. Her evaluation of the ease of transferring salary to business income is also way off. It is a challenge but the IRS is willing to litigate historically. There is no reason to think that they would change their behavior when more is at stake. Despite Laura getting the arithmetic wrong, it would be a benefit to the owners organizations like accounting firms. End Sidebar.

There do seem, however, to be some agreement on the points of the plan:

Reducing corporate tax rates substantially [Yea!, Yea!, Yea!]

Reducing pass thru rates (as in the sidebar) substantially [Yea!]

Going to a territorial tax plan [Yea!, Yea!]

Reducing individual rates [How much? We would not go far.]

Eliminating some deductions and increasing standard deduction [Yea!]

Eliminate the Alternative Minimum Tax [Yea!, Yea!]

Eliminate the Death Tax [Yea!, Yea!]

It does not include the Border Adjustment Tax (BAT) [Yea!, Yea!]

The plan will pay for itself [Boooo!]

It looks like a rational plan. We believe in the growth fairy but are concerned about the impact on the deficit. The plan needs to be evaluated on dynamic scoring but the deficit reduction cannot be a vague plan in the out years. The Donald has wisely left out lots of details to give room for negotiation. The downside is that it leaves open the deficit solution of bringing in the BAT. Let’s consider the plan in regular order.